Legg Mason Shores Up Cash Funds With $1.12 Billion (Update2)

By Sree Vidya Bhaktavatsalam


Dec. 28 (Bloomberg) -- Legg Mason Inc. pumped $1.12 billion into two non-U.S. cash funds to prevent losses, the biggest bailout by a money manager tied to asset-backed debt sold by structured investment vehicles.

The move, along with an earlier cash infusion, will reduce earnings per share by 15 cents in the quarter ending Dec. 31, the Baltimore-based company said today in a statement. Legg Mason has provided $1.47 billion to support money funds and other cash- management portfolios since November.

SIVs were popular investments for money funds looking to increase yields. The vehicles sold commercial paper or medium- term debt, some backed by subprime mortgages, that has plunged in value on fears that they will be hurt by rising home loan defaults. Bank of America Corp., Federated Investors Inc. and SunTrust Banks Inc. propped up funds with SIV-issued debt in the past month to prevent losses for investors.

``This action is consistent with our ongoing efforts to reduce the ABCP exposure in our liquidity funds in light of current stresses in the credit markets,'' Raymond ``Chip'' Mason, Legg Mason's chief executive officer, said today in a statement, referring to asset-backed commercial paper.

To raise the capital, Legg Mason entered a total-return swap with Barclays Plc, which purchased SIV securities from Legg Mason.

Names of SIVs

Barclays bought securities issued by K2 (USA) LLC, Whistlejacket Capital Ltd. and White Pine Finance LLC. K2, a Dresdner Bank AG SIV, has between $22 billion and $25 billion of assets. Dresdner, owned by Munich-based Allianz SE, has no obligation to consolidate the SIV's assets and no plan to do so, Allianz Chief Financial Officer Helmut Perlet said Nov. 9. Whistlejacket is a SIV managed by Standard Chartered Plc.

SIVs now account for 3.2 percent of Legg Mason's $164 billion in cash funds, compared with 6.4 percent on Oct. 31. Some 1.1 percent of Legg Mason's cash-fund assets are invested in bank-sponsored SIVs, which have announced their support of those securities, Legg Mason said.

SIVs use proceeds from short-term debt to buy longer-term securities backed by assets including subprime mortgages and credit-card receivables.

Legg Mason announced its move after the close of regular U.S. trading. Legg Mason shares fell 41 cents to $71.23 today in New York Stock Exchange composite trading. The shares have slumped 25 percent this year.